1) In general, interest on bonds, like dividends on preferred stock, may be deferred until
a later date at the discretion of management, making debt financing more appealing to
corporate managers.
2) The benefits of diversification occur as long as the investments in a portfolio are not
perfectly positively correlated.
3) One example of a terminal cash flow is the recapture of the net working capital
associated with the project.
4) Because most preferred stocks are perpetuities, their value can be determined by
dividing the annual dividend by an investor’s required return.
5) Theoretically, market values of assets are better for evaluating the creation of
shareholder wealth than accounting numbers, but accounting numbers are used because
they are more readily available.
6) Junk bonds are also called high-yield bonds.
7) A method for estimating a project’s beta that attempts to identify publicly traded
firms engage solely in the same business as the project is called the pure play method.
8) Restrictive provisions in bond indenture agreements are designed to protect
bondholders and lessen the agency problems between bondholders and stockholders.
9) The goal of most financial managers is to reduce the amount of long-term debt to
zero, thus maximizing shareholder wealth.
10) The percent of sales method does not provide a reasonable prediction of asset levels
for instances when there are economies of scale in the use of the asset being forecast
and when asset purchases are lumpy.
11) One problem with maximization of shareholder wealth as a goal is that it ignores
risk taken by the firm’s financial decisions.
12) Federal tax law is irrelevant to corporate dividend policy because dividends are not
tax deductible.
13) Spontaneous financing is financing obtained at the last minute due to poor financial
planning.
14) Net income is the best measure to use for evaluating a firm’s profits on assets
because it includes the effect of financing as well as the effect of operations.
15) If we invest money for 10 years at 8 percent interest, compounded semiannually, we
are really investing money for 20 six-month periods, and receiving 4 percent interest
each period.
16) Generally Accepted Accounting Principles (GAAP). GAAP is a set of
principle-based accounting standards established by the Financial Accounting Standards
Board (FASB).
17) The current ratio and the acid test ratio both measure financial leverage.